Income protection or Critical Illness insurance; which should I choose?
Even the least financially aware people are conscious of the fact that if they were unable to work and their pay stopped as a result, they could be in trouble. There are various reasons why this might happen. Redundancy or illness, for example could mean that your pay or salary stops, but in effect, the vast majority of people are in a position to insure themselves against each of these unfortunate situations. Many people avail of this peace of mind, but a significant number of people don’t. This is often because they’re unsure about what type of insurance to take out. When it comes to illness cover, many people find themselves facing the question: Income protection or Critical Illness insurance; which should I choose?
In this blog post, we want to look at these two insurance policy options that provide cover in the event of illness and inability to work. They are both very different yet are sometimes confused, which is why we thought it would be useful to write an article explaining them here.
The most logical place to start is by defining the difference between the two types of insurance. Here is a very brief overview:
What is Income Protection?
An Income protection policy covers your earnings in the even of sickness or injury. With the ability to pay out up to 75% of your gross income, until retirement, this type of policy covers you from pretty much any illness or injury that stops you working. What’s more, claims can be made several times during the lifetime of an income protection policy.
What is Critical Illness Cover?
Unlike income protection policies, a critical illness contract pays out a lump sum and pays once only. Critical illness contracts aren’t related in any way to your income and become payable on the diagnosis of a list of critical illnesses, which are defined in your contract; such as cancer, stroke or heart attack. The payment may or may not be connected with your ability to work.
So the main differences between the two are when they pay out and what they cover. With income protection, if you are deemed to be unable to work for medical reasons, you will receive a monthly income to help replace your earnings. With critical illness cover, you will receive a lump sum in the event of suffering one of the pre-defined critical illnesses.
There are various options in each type of policy that mean you can alter the cover to suit your specific requirements but two of the key things to bear in mind are:
- Certain income protection options may mean that if you can do any job, not necessarily your own they won’t pay out.
- Certain critical illness contracts will only pay out in severe cases of the critical illnesses covered.
Choosing the right type of contract for your specific needs is a complex affair and shouldn’t be entered into without obtaining quality advice. Because the features and benefits of such policies are so complex, to be honest, only an expert can translate the real value of each option to your unique circumstances.
In order to illustrate this, let me compare an income protection policy versus a critical illness contract in the event of a heart attack. In this situation, there are two very different potential outcomes. Let’s assume that the heart attack allowed the person to return to work after a relatively brief spell off sick. With a critical illness contract they would have their lump sum in the bank (assuming the heart attack fulfilled the criteria of their contract) and with an income protection policy, you would only have received cover if you were off sick for more than their deferred period. All of that said, it is also worth bearing in mind that in as many as 50% of historic situations where people were off work sick for 6 months, they wouldn’t have qualified for a critical illness contract payout because their illness was not deemed to be ‘critical’.
So while both of these policies provide financial peace of mind in the event of illness or injury, their reasons for paying out and the nature of those payouts are very different. As a result, the answer to the question: Income protection or Critical Illness insurance; which should I choose? Is; it depends. It depends entirely on your own personal circumstances.
If you’d like a professional helping hand to decide which contract would suit you best, why not get in touch? We know exactly how to determine which type of policy would satisfy your unique needs and more than that, we speak your language when it comes to explaining the differences.
Author: Fran Cooke